Enovix Corp quarterly report, Q3 FY2023

Business context and reporting period

Enovix Corporation designs, develops and manufactures silicon-anode lithium-ion batteries. This unaudited Form 10-Q covers the quarter ended October 1, 2023, and fiscal year-to-date (YTD) results through that date; comparisons are with the quarter and YTD period ended October 2, 2022. The company remains in early commercialization, with limited product revenue and substantial manufacturing, development, and expansion spending.

Financial results and liquidity

Metric	Q3 2023	Q3 2022	YTD 2023	YTD 2022
Revenue	$0.2 million	$0.008 million	$0.263 million	$5.109 million
Gross loss	$16.6 million	$6.6 million	$43.0 million	$7.8 million
Operating loss	$50.4 million	$33.7 million	$165.5 million	$86.8 million
Net loss	$16.2 million	$82.0 million	$154.1 million	$40.4 million
Operating cash flow	Not provided for quarter	Not provided for quarter	$(77.4) million	$(60.9) million

Q3 revenue was primarily from shipments of custom-sized batteries to the U.S. Army. The YTD revenue decline reflects the prior-year recognition of $5.1 million of service revenue from completed customer contract milestones.
Gross margins were deeply negative: cost of revenue was $16.8 million in Q3 and $43.3 million YTD. Management attributed higher costs mainly to production labor, depreciation, facilities, and manufacturing overhead.
Q3 net loss included a $31.3 million non-cash gain from a decrease in the fair value of private placement warrants. YTD warrant fair-value gains were $4.1 million. These gains materially affect reported net loss and are not operating revenue.
YTD capital expenditures were $33.0 million; free cash flow, as defined by the company, was negative $110.4 million. Net cash used in investing activities was $132.0 million, including $115.7 million of investment purchases and $16.7 million of maturities.
At October 1, 2023, cash, cash equivalents, restricted cash, and short-term investments totaled $371.5 million; working capital was $331.6 million. Cash and cash equivalents were $270.8 million and short-term investments were $100.5 million. Accumulated deficit was $538.9 million.
Outstanding convertible senior notes had $172.5 million principal, bear 3.0% interest, and mature May 1, 2028; carrying value, net of issuance costs, was $167.1 million. The notes are convertible subject to specified conditions.
Stock-based compensation expense was $57.8 million YTD, including $21.1 million related to first-quarter equity award modifications. Unrecognized compensation expense was approximately $140.1 million at quarter-end.

Material changes versus the prior comparable period

YTD revenue fell to $0.263 million from $5.109 million, while cost of revenue rose to $43.3 million from $12.9 million as production ramped and factory overhead and depreciation increased.
YTD operating expenses increased 55% to $122.4 million. R&D rose 27% to $53.8 million and selling, general and administrative expense rose 67% to $61.2 million. The company cited executive departures and related one-time compensation costs, higher headcount and stock compensation, Malaysia operations, and Routejade acquisition costs.
YTD cash used in operations increased by $16.5 million. The company raised $172.5 million through convertible notes in April 2023 and invested in short-term securities.
Property and equipment, net, increased to $136.7 million from $103.9 million at January 1, 2023. The company recorded a $4.4 million equipment impairment YTD.

Outlook, management commentary, risks, and unusual items

Management expects available cash to cover funding requirements for the next 12 months, based on anticipated spending and timing, while noting that delays or lower capital efficiency could change cash needs. It expects operating losses and negative operating cash flows to continue and may need additional financing over time.
In August, Enovix began factory acceptance testing of Gen2 manufacturing equipment and reported completing testing for one of four production-line zones. Management said it was on track to install the Agility pilot line for customer qualification and produce first samples from its first high-volume Gen2 Autoline in April 2024.
On October 3, 2023, immediately after quarter-end, the company announced a strategic realignment of Fremont Fab1 from a manufacturing hub to a “Center for Innovation,” including workforce reductions. Management expects the plan to be substantially completed in Q4 2023 and estimated an annualized burn-rate reduction of approximately $22 million. It recorded $3.0 million of restructuring costs in Q3/YTD and expects approximately $36 million of accelerated depreciation on Gen1 equipment between Q4 2023 and Q1 2024.
Enovix shifted toward a vertical commercial strategy focused on selected customer relationships and custom designs. It reported a product selection for a medical monitor expected to be sold in 2024. It estimated Routejade, acquired October 31, 2023, would provide approximately $3 million to $4 million of Q4 2023 revenue; the acquisition consideration was approximately $15.8 million cash plus 5,923,521 shares.
Under its Malaysia manufacturing arrangement with YBS, Enovix has a cost-plus agreement and a minimum commitment. YBS’s subsidiary OSSB obtained financing for a $70 million term loan, but no loan balance was outstanding and no collateral deposit had been made as of October 1. Enovix committed to deposit sufficient collateral with OCBC; collateral would be restricted cash and unavailable for general liquidity needs.
Open purchase orders and other ordinary-course commitments totaled approximately $73.7 million at October 1, up from $22.7 million at January 1. The company also has $3.8 million of deferred revenue and customer order deposits, which it does not currently expect to recognize as revenue within 12 months.
A securities class action alleges misstatements concerning manufacturing scale-up and equipment testing; the company moved to dismiss and said it cannot reasonably estimate a possible loss. Two employment-related putative class actions are also disclosed. The company recorded an estimate for one wage-and-hour matter and said it intends to defend the claims.
During Q3, a transfer-agent administrative error resulted in 1.3 million shares being issued to former executives. Enovix estimated a $22.4 million loss but expects full recovery of the shares; the issuance and probable recovery were recorded in additional paid-in capital, with no income-statement impact.
Key risks include scaling manufacturing yield, throughput and cost; qualifying products and production lines with customers; reliance on suppliers and the YBS arrangement; battery performance and safety; capital needs and potential dilution; convertible debt obligations; and execution and integration of the Routejade acquisition. Management reported disclosure controls were effective at a reasonable assurance level.

Most important facts for investors to verify

Whether Gen2 and Agility line testing, installation, customer qualification, and the targeted April 2024 sample timing proceed as stated.
Actual cash burn, capital spending, and the timing and amount of collateral required under the OCBC deposit agreement; assess liquidity after the Routejade cash consideration and other commitments.
Whether Fab1 restructuring delivers the projected savings, and the timing and financial effect of the approximately $36 million accelerated depreciation.
Whether product shipments and customer qualifications grow into material, recurring revenue, and whether manufacturing costs, yields, and margins improve.
Routejade’s completed purchase accounting, integration progress, realized revenue contribution, and issued-share dilution.
Developments in the securities and employment litigation, recovery of the mistakenly issued shares, and potential dilution or cash obligations under the convertible notes and warrants.